United States: Inclusionary Housing On The Run

Several recent legal developments have cast doubt on the ability
of California cities to continue using favored tools to promote
construction of "inclusionary" affordable housing units.
Few would dispute that the state faces a "severe shortage of
affordable housing," as the Legislature has
declared.1 But this consensus has not translated into
agreement on how best to allocate the societal burden of providing
affordable housing. As conflicts have intensified over a number of
cities' approaches to inclusionary housing, the courts have
created a patchwork of law that has provided little practical
guidance to local governments or developers, but recent actions by
the Governor and the California Supreme Court may be bringing
things into focus.

BACKGROUND: THE PALMER/PATTERSON
LANDSCAPE

The current stage was set primarily by two appellate decisions
in 2009 that dealt a blow to affordable housing advocates, but left
many questions unanswered. In Palmer/Sixth Street Properties v.
City of Los Angeles,2 the Second District Court of
Appeal held that an ordinance requiring developers to set aside
rental units for inclusionary use violated the state's
Costa-Hawkins Act, the rent "de-control" law that allows
landlords to set initial rents. Decided around the same time,
Building Industry Association of Central California v. City of
Patterson3 concerned a requirement to pay in-lieu
fees as a condition of developing ownership units. The Fifth
District applied an exactions analysis to find that such a fee is
not "reasonably justified" unless the City can show a
reasonable relationship between that fee and the
"deleterious" impact of the development itself,
a general interest in increasing affordable housing is not
enough.

Following these decisions, many cities either amended or
suspended their existing ordinances, and developers started looking
for opportunities to push back against imposition of legally
questionable inclusionary requirements.

AB 1229: A DEFEAT FOR PALMER FOES

Since the Palmer decision, there have been periodic
efforts by the Legislature to give back to cities some of the tools
Palmer had taken away, including a 2013 bill. Introduced
by Assembly member Toni Atkins (San Diego), AB 1229 passed the Assembly and Senate largely
along party lines; no Republicans voted for the bill, although
several Democrats voted against it. The bill would have
reestablished the authority of local governments to impose
inclusionary housing requirements as a condition of development
approvals, and would expressly supersede Palmer to the
extent it conflicted with this authority.

However, on October 13, Governor Brown returned the bill without
his signature. The Governor issued a statement regarding his veto, stating that in
his experience as mayor of Oakland, he saw "how difficult it
can be to attract development to low and middle income communities.
Requiring developers to include below-market units in their
projects can exacerbate these challenges, even while not
meaningfully increasing the amount of affordable housing in a given
community." The statement also noted that the Governor would
like the benefit of the Supreme Court's view before making
other changes to the law.

As Governor Brown alluded, the Supreme Court was considering
certain inclusionary housing requirements at the time AB 1229 was
vetoed. Just four days later, on October 17, the Supreme Court
issued its unanimous opinion in Sterling Park, L.P. v. City of Palo
Alto,4 potentially giving developers more
ammunition to challenge the imposition of inclusionary housing
conditions. Sterling Park received approval to construct 96
residential condominiums in Palo Alto, conditioned upon inclusion
of 10 on-site below-market units coupled with payment of a fee
totaling approximately 5% of the sales value of the market rate
units.

The Court held that both requirements were "exactions"
to be considered under the Mitigation Fee Act, rather than land use
regulations under the Subdivision Map Act. The distinction is
important, not only because a longer statute of limitations may
apply under the Mitigation Fee Act, but because
"exactions" must be subjected to a higher level of
scrutiny than land use regulations. To survive an exactions
challenge, a governmental entity generally must demonstrate a
"nexus" between the exaction and the impact it is
intended to address, and "rough proportionality" in the
size of the exaction. However, the Court declined to consider the
merits of whether the Palo Alto fee met these requirements (or even
to consider whether requiring sales of below-market rate units
would be an "exaction" in every case), and remanded to
the Sixth District for further review.

In September, the Supreme Court granted review of another South
Bay city's inclusionary housing ordinance. In California Building Industry Association v.
City of San Jose,5 the Sixth District had
denied a facial challenge to the city's ordinance, on the basis
that it was "the wrong question to ask" whether the
ordinance complied with the test set forth in Patterson
and San Remo Hotel v. City and County of San
Francisco.6 Because San Jose's inclusionary
housing ordinance was not adopted for the purpose of
mitigating housing loss caused by the new development, the Court of
Appeal reasoned that the inclusionary housing requirements did not
need to be analyzed as exactions, instead, the Court treated these
requirements as land use regulations. But in light of Sterling
Park, it seems unlikely that San Jose, or any other city, can
avoid the exactions analysis simply by framing its inclusionary
policies in these terms.

The Supreme Court granted review to address the standard of
review that applies to a facial constitutional challenge to
inclusionary housing ordinances that require on-site affordable
units or payment of in-lieu fees as a condition of project
approval.

WHAT LIES AHEAD FOR INCLUSIONARY HOUSING?

What lies ahead depends largely on the Supreme Court's
decision in the San Jose case, and potentially on the decision on
the merits in the Palo Alto case, following remand. The timing of
the Supreme Court decision is impossible to predict, but it is
reasonable to expect the decision during 2014. Cities across the
state will likely be scrambling to evaluate whether their
ordinances pass muster under the "exactions" analysis,
though significant changes aren't likely to happen until the
Supreme Court weighs in again. In the meantime, the new uncertainty
may cause some cities to reevaluate their existing plans and
potentially even delay approval of residential projects in the
pipeline. A new wave of litigation over as-applied inclusionary
requirements may also be coming, as developers seek to test the
boundaries of what may be permitted under current law. In any case,
each inclusionary housing ordinance will require careful analysis
on its own terms to ensure it can pass the exactions test as well
as the Palmer ruling, which remains good law due to
Governor Brown's veto of AB 1229.

Footnotes

1 Government Code § 65913(a).

2 175 Cal. App. 4th 1396 (2009).

3 171 Cal. App. 4th 886 (2009).

4 No. S204771, filed Oct. 17, 2013.

5 No. H038563, filed June 6, 2013.

6 27 Cal.4th 643 (2002).

Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
situations.

When asserting or defending third-party claims in the context of construction litigation, the underlying plaintiff's choice of legal theories can often dictate the available remedies for defendant(s) ...

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